Here is where the flaw in the analysis is buried “Net financial assets in the private sector declined by $214.25 billion in April and have prolonged the current stock market retrace.”

When you only talk about net assets, you exclude the counting of borrowed assets like money because the borrowed money is cancelled by the debt in the static analysis of net assets. But that does not mean that the borrowed money during the life of the loan isn’t producing economic benefits. It doesn’t mean that the benefits disappear when the loan is paid back.

When any entity borrows money and puts it to productive use, the borrowed money is producing profits that exceed the cost of borrowing the money. It’s called leverage. If people don’t think that the use of leverage is economically important, they haven’t understood the mantra of “buy now, pay later.” Surely borrowing can lead to trouble if the purchase doesn’t more than pay for itself, that’s why leverage is risky. However, well calculated risk usually has big rewards.

So the bullet point is right that net assets, more accurately called high powered money in MMT lingo, has been removed from the economy. However, they are failing to take into account the private lending can, under the right circumstances, replace the missing high powered money with low powered money created in the private sector through the making of loans. If you only look at a one piece of the economy, you cannot always predict what the consequences will be.

I haven’t even thrown in the mark-to-market asset valuation technique that also has huge economic impacts. Can one tulip bulb really have a value that was placed on it during the Dutch Golden Age?

This month has seen the antipodean central banks both cut rates, with almost no flow through to mortgages to relieve consumer debt and an appreciation in their respective currencies, in perfect opposition to their stated goals.

This is not a new trend – far from it. What’s supposed to happen when the local economy slows is you pull the lever, Kronk, lower interest rates stimulate consumer spending, reducing savings rate as a deluge of money floods the economy, inflation goes up, wages go up, more spending and whoosh, in come the accolades from the captured business media elites.

Now levers are pulled left right and centre and nothing seems to happen, further hindered by a lack of communication from both monetary and fiscal authorities into the truth of the matter at hand – that a lack of confidence in the direction of the economy is what is holding back consumer spending, not lower rates.

I’d like to throw out the following challenge to conventional economic theory.

Does even a fiscal stimulus of a budget deficit always stimulate the economy?

I have been thinking that with our current system, the federal government finances deficits by selling bonds. So whatever liquidity they push into the system is offset by taking it right back out in the form of bonds sold.

What deficits really do to stimulate the economy is to redistribute a fixed amount of liquidity in the private sector. When this entails taking money from the wealthy who do not recirculate it, and putting it in the hands of working people who do circulate it, then we get stimulus.

When deficits don’t stimulate the economy is when the deficit is the result of tax cuts that leave the liquidity in the hands of the wealthy. Taking liquidity from the hands of the workers when we shift the tax burden from the wealthy to the workers is the opposite of stimulus.

I’d love to see some research done on this idea and some article published.

Finally someone is making the case for alternative views of how to run an economy. I have been saying for years that the complainers about other country’s industrial policies are wrong that these countries are being unfair.

There should be no rule that you can’t have an industrial policy. If their way of playing the game is so much better than ours, don’t force them to play as badly as we do. Why don’t we try to play as well as they do?

Paul Krugman’s column, Franklin Delano Obama?, explains a lot about what did and didn’t happen during Franklin Roosevelt’s attempt to solve the Depression era economic crisis. We are probably going to hear a lot of attacks on Roosevelt’s record. It is nice to keep in mind what were his true successes and failures.

I have heard the right wing attacks that Krugman debunks. This is the first time I have heard a rebuttal from someone that I can believe.

Follow this link to read the Washington Post story on the recent Tax Ruliing by Treasury Secretary Paulson that gives banks an estimated $140 billion tax break.

It is hard to know what to make of this story. If rescinding this decision would do great harm to the economy, then maybe it was not a bad decision. Should Congress be in the business of making laws that wreck the economy just so they can exert their authority?

If it was a bad decision, then there ought to be a way to put it right without wrecking the economy.

Until this contradiction can be answered, then I don’t think we have enough information to decide what to do. This news story is just the beginning of what we need to know.

There is also mention in the Minyanville article about why deflation might not be such a bad thing. If you think of high tech electronic products like personal computers, cell phones, and digital cameras, they have been sold in an environment of deflation for these products for years. In other words, the cost for an equivalent amount of functionality in these products has been rapidly declining ever since these products have been on the market. The makers and sellers of these products have found a way to survive and even thrive in such an environment. It isn’t easy, but it is possible.

Another gem has been brought to my attention by Deb, one of my contacts. Click on the image below to get to the web page that has the interview.

This is an interview of Robert Kuttner by Terry Gross on the program Fresh Air from WHYY as heard on National Public Radio. The interview is 38 minutes. It provides the reason to believe that Barack Obama has a chance of solving the country’s economic problems. Robert Kuttner provides the facts and figures that dispel the notion that we don’t have the resources to solve these problems.

He also explains how we need Obama’s great skills to educate the public on what needs to be done and why. Once the public understands, then it is going to require the public’s pressure on the rest of our leaders to support Barack Obama’s policies.

The need for this public pressure is exactly why it was so important that Obama built such a huge following in his election campaign and he did his best to avoid alienating people who have not yet come on board. The need for the voters’ involvement has not ended with Obama’s election.

If you understand Kuttner’s argument, then you will see why John McCain would have been a total disaster as President during these economic times.

By the way, as an application of Greenberg’s Law of The Media, no wonder Terry Gross cannot get her head around such large numbers as trillions. She thinks a trillion is a billion billion, when actually it is only a thousand billion.

“I have found a flaw,” said Greenspan, referring to his economic philosophy.

…

“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said Greenspan.

I have been telling people for years that reading too much Ayn Rand can lead to these kinds of flaws in one’s philosophy. I made this discovery when I was a sophomore in college in 1962. For those who do not know, Alan Greenspan is famous for being an acolyte of Ayn Rand.

In Ayn Rand’s universe, industrialists were the heroes who fought to make the world work only to be hindered by lesser mortals who were just interested in taking these heroes’ well gotten gains.

Although it has nothing to do with being poor, I suppose in Greenspan’s universe only poor people commit crimes. That is why we have police and jails. It is certainly not for the wealthy industrialists/bankers. I don’t know if Greenspan was aware of the stream of CEOs that were being tried and heading toward their own stays in the Graybar hotel. Maybe Greenspan managed to hear about Enron.

Greenspan could just not contemplate the possibility that managers who were paid millions of dollars a year, were given stock options, and golden parachutes if they got fired would make as much money, as quickly as possible, by whatever means necessary, and then get the heck out.

Alan Greenspan has years and years of experience yet he is more naive than a college sophomore. It would be unbelievable had I not already known what a big fan of Ayn Rand that he was. From that fact alone, I knew we were in trouble the moment that I discovered who his favorite author was.

Perhaps we need a President who is not so ideologically driven that he is afraid to hear ideas that contradict his philosophy. Colin Powell has identified Obama as intellectually rigorous as opposed to McCain, whose judgment he questions.

For the record, let it be known, that I believe almost all purist adherents to a single philosophy suffer from a common problem. In the ideal universes that they build up in their minds, they make no concession to the range of observed human behavior. Such purist adherents to single philosophies include both Communists and Capitalists, among others.

McCain still doesn’t get it. Normally you do not cut federal spending when the economy goes into a recession. Cutting spending does not create jobs, it kills them. Cutting spending was part of the Hoover plan during the depression. Even Roosevelt was unaware, at the beginning of his term, of the problem that budget cutting causes. It took the economist John Maynard Keynes to explain it.

The problem with the current economy is that business and consumers are too afraid to spend money, and rightfully so. This behavior creates a downward spiral for the economy. If you give people money in tax breaks, it goes right to savings if they can afford to save. They want to set aside money for a rainy day. The banks don’t want to lend the money that people are depositing due to the same fear. Money not circulating causes the economy to contract.

When things get really bad, the only way to get money circulating is for the government to spend it to buy things. If the government buys things that are investments in economic growth, then so much the better.

This is how we got so much infrastructure built during the depression of the 1930s. We are still benefiting from the dams and other items that were built back then.

Such investments could be roads, public transportation, airports, water treatment facilities, schools, funding of science and engineering research and development. Blowing up the money in Iraq is not such an investment.

By the way, if the rich get too fearful to spend their money, then the government may have to tax some of it and spend it. Otherwise, its trickle down is not even a trickle.

Follow this link to a transcript of a speech that Ben Bernanke gave at the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia March 2, 2004.

Bernanke is reputed to be an expert on the Great Depression. There are huge expectations that he will use his knowledge to help solve the current crisis. Why not try to learn from him some of what he knows? The lecture is very informative and has a number of references for follow-up reserach.